The Old Mutual Global Strategic Bond and Global Bond funds have reduced their exposure to interest rate rises and to the euro in response to increasing inflation and eurozone concerns.
The group eliminated exposure to the euro, saying the European Union would need to double the size of the €750 billion (£626 billion) eurozone bail-out fund to ensure full repayment of eurozone government debt.
Stewart Cowley, the head of fixed income at Old Mutual Asset Managers (Omam), says Portuguese and Spanish funding needs will exceed €350 billion over the next two years. If Spain resorts to international aid, yields on Italian and Belgium debt could rise, taking European bank debt with it. (article continues below)
Without adequate guarantees, there would most likely be a round of serious defaults leading to years of chaos for the euro, Cowley predicts. He says Germany and China would need to step in to refinance government debt.
Omam warns that if the funding is not found soon it is likely to consider increasing its exposure to shorter-term areas of the European debt market on the basis of a gloomier long-term outlook. It has already made such a move over the dollar.
The Global Strategic Bond and Global Bond funds have cut the duration of their dollar holdings to negative based on the expanding American government deficit and extension of quantitative easing. However, Omam says there is still a chance the eurozone may find enough support from the thriving German economy and may eventually prove an attractive investment for China.
Cowley says peripheral eurozone countries would give China an opportunity to diversify its massive fixed income reserves.